Parents also must avoid crippling student debt

Student loan debt has soared to about $1 trillion, with many college students naively tying a noose around their futures with crippling levels of debt. But what about their parents?

Parents are getting into trouble too. They should be asking: Can I really afford to send my child to this college or would another one be better? Many are taking on far more debt than they should.

In the past five years, as college prices have soared and households have suffered financial trouble, parents have increased their borrowing about 33 percent through federal Parent PLUS loans. The average single-year federal Parent PLUS loan was $12,000 this school year, compared with $9,850 in 2007, said Jason Delisle, director of the New America Foundation's federal education budget project.

"The parent side of borrowing is very disturbing," Delisle said. "They can take on this debt without any income check."

With interest rates at 7.9 percent on Parent PLUS loans, the government lets parents borrow the entire cost of college if they are so inclined.

Few parents want to disappoint their children, and they feel guilty for deficient saving, so they often stretch too far with debt.

"It's an emotional time for parents," said certified financial planner Cheryl Krueger. "But they should figure out what they can afford rather than concluding, 'This will just work out.'"

The clear lesson of the past few years has been financial matters can go from bad to worse if your plan goes no further than hoping things work out. Jobs can be less secure than assumed, 401(k) and college saving funds can drop 50 percent, and homes lose value.

Before telling children they can say "yes" to a college that's just offered them a place in next fall's freshman class, Krueger said, "This is one time when you should do a budget."

The Web makes the process relatively easy. First, go through the offer from a college and make sure you understand exactly what the school is expecting you to pay out of pocket or through loans. Financial aid letters can be confusing, and it's fine to call the director of financial aid and ask for an explanation so you know your obligation. Realize that costs may go up 5 percent or more each year, and financial aid can change each year. Ask for more aid if you have lost a job recently.

Next, do a budget using a Web calculator that nudges you to recall spending and does the math for you. This one — tinyurl.com/doabudget — is among my favorites because it emphasizes spending only 50 percent of income a month on necessities, including projected college loan payments. If you are going much above 50 percent, that's wishful thinking and potentially risky.

About 20 percent of your income should be going to savings, some for emergencies so you don't have to whip out credit cards for expenses like flat tires, and at least 10 percent a month for retirement saving. Many people put only leftover money into savings. You should commit to saving more, especially if you are getting close to retirement age. Planning to work until 70 is wishful thinking. You might lose your job or get ill.

Try the ballpark estimate calculator at choosetosave.org to make sure you are saving enough for retirement. If you have plenty, you might be able to cut back on new contributions to your 401(k) temporarily while sending your child to college. But more than likely you need to save more rather than cut back. For a bare-bones retirement, your Social Security and savings need to provide about 70 percent of your old annual pay.

Once you have filled in your current spending in the budget, add the monthly interest payments you will be taking on if you borrow what you've planned for college. Use the FinAid loan calculator to easily calculate what your monthly payments will be at tinyurl.com/finaidcalculator.

For example, with a $12,000 loan at 7.9 percent, you need to be able to afford $144.96 a month in your budget to handle payments for 10 years.

Over the complete period you will pay $17,395, which includes the original loan plus $5,395 in interest. If you would like to avoid paying as much interest, try to pay more college expenses out of pocket.

"People can often free up money by skipping vacations for four years or delaying car purchases," Krueger said. "Look for repetitive payments like phones. Be concrete." If the numbers don't work, have your child consider another college.